The figures will fan talk of fresh Bank of Japan measures, after policymakers shocked markets last month with an unprecedented negative interest rate policy - widely seen as a desperate move to kickstart the world's number three economy.

Weak demand for big-ticket items like cars and home appliances held back the vast economy which shrank 0.4 per cent in October-December - or an annualised 1.4 per cent drop.

That was Japan's second quarterly contraction in 2015, although GDP edge up a tepid 0.4 per cent for the whole year, underscoring Tokyo's challenge in slaying deflation and cementing a sustained recovery.

Tokyo brushed off the weak numbers, saying that "the fundamentals (of the economy) remain good", but analysts countered that Abe's growth plan was stumbling.

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The premier's bid to revive Japan's once-soaring economy, dubbed Abenomics, has also been shaken by a bloodbath on equity markets since the start of the year and a resurgent yen that threatened to dent companies' profits.

"The latest data show that it is difficult to say that the Abe government has achieved of its goal of a 'virtuous cycle' of rising incomes, wages, and investment," said Tobias Harris, political risk analyst at US-based consultancy Teneo.

"Japan has remained too dependent on export-led growth, which has suffered in light of China's slowdown and the effects it has had on the global economy." Japan's factory output has suffered as worries persist about global growth, with revised data Monday showing industrial production contracted 1.7 per cent in December, worse than a preliminary 1.4 per cent drop.

However Tokyo's Nikkei 225 stock index soared more than seven per cent Monday, boosted by bargain-buying and a weaker yen following last week's 11 per cent drop.

The yen, which surged four per cent last week against the dollar, turned lower Monday on talk about the BoJ unveiling fresh monetary easing measures as well as speculation about Tokyo intervening in currency markets to stem the unit's rise.

The wild volatility on world markets and sharp swings in the yen since the start of 2016 prompted Abe on Friday to hold an emergency meeting with Japan's central bank chief Haruhiko Kuroda.

The BoJ shocked investors by announcing the negative rate policy last month, a plan that aims to prod banks into lending by charging them for storing excess reserves with it.

But as his growth programme wobbles and the BoJ struggles to hit an ambitious two-per cent inflation target, Abe must decide whether to follow through with another sales tax hike next year.

The rise is seen as key to containing a spiralling national debt, but it could further dent spending.

"It is not carved in stone, if the real problems are going on he can push it out," said Nicholas Smith, Japan strategist at brokerage CLSA, referring to the planned tax rise.

"With what's going on in the market, this is a temptation." Abe's growth plan - big government spending, central bank monetary easing and reforms to the highly regulated economy - appeared to bear fruit at first.

The yen weakened sharply, which boosted Japanese exporters' profits and sparked a huge stock market rally.

But sustained growth has been elusive and Abe's efforts to overhaul the economy have been widely criticised as half-hearted.

Tokyo will be watching labour talks this spring closely for signs that firms are ready to put more cash into employees' pockets, which would offer hope for a pick-up in consumer spending.

"The government plans to raise the consumption tax in 2017, so we will probably see an increase in spending later this year ahead of the hike," said Taro Saito, senior economist at NLI Research Institute.

"But I don't think we should expect the fundamentals of the Japanese economy to recover easily."

AFP

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